Avoid Farm Loan Application Denial

There are several steps you can take to improve your chances of successfully applying for a farm loan. Loan approval hinges on several factors, including the applicant's income, assets, debts, credit score, and collateral, as well as the property's appraised value. You may not be able to change many of these factors, but you can do some things that will increase your chances of securing a loan for your farm or other rural property.

Steps

  1. Realize that there are no magic shortcuts. Each applicant's situation is unique to that specific farm operation. There are no magic tricks that can help every application get approved. You're asking a lender to make an investment in your operation, so it's crucial to put your best foot forward. While many factors depend on market forces you can't control, and others are tied to long-term, strategic moves on behalf of your business, there are some factors you can manipulate to improve your chances of being approved for a farm loan.
  2. View your credit report. Prior to having your credit report pulled by a farm lender, it's beneficial to pay down credit cards and other debt as much as possible.
    • Credit card companies typically report your current balance to the credit agencies at the end of each month, so paying down your balance around the 25th of the month (and prior to a credit pull) will probably result in an improvement in not only your credit score but your debt-to-income ratio.
  3. Use income-tax-planning strategies. This can maximize the income you show for farm-credit approval. For example, depreciation is an expense that can augment your income in the eyes of many farm lenders. Thus, it may be possible to add depreciation back to income, since it is a non-cash expense. For other tax-planning strategies contact your lender, accountant, or financial advisor.
  4. Get a good appraisal. The appraisal is commonly the final stage of the loan-approval process. Selecting the right appraiser can result in a more accurate property valuation. This benefits you, because appraisers who are well informed about current market conditions and recent farm sales in your area do not need to be conservative, since they are able to be accurate.
    • Hire a certified agricultural appraiser recommended by the lender you're working with. That in itself will help you secure the loan.

Tips

  • You would probably need a credit score of at least 680 to get approved for a farm loan.
  • You need a 70% LTV (loan-to-value ratio) to get approved by most lenders.
  • If you are looking for a farm loan under $300,000, contact the USDA Farm Service Agency or a local branch of Farm Credit.
  • Contact a farm lender that will help you with tax-planning strategies to maximize your chances of getting approved.

Warnings

  • Consult with your lender before getting an agricultural appraisal. If the appraisal is not performed by an appraiser the lender likes, it may not do you much good.

Things You'll Need

  • Three years of your most recent tax returns
  • A credit score of 640 or above from each credit-reporting agency
  • An agricultural appraisal by a certified and approved farm appraiser
  • Flood Insurance on all buildings

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References

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